Corporate Finance (for Dennis Wright)
trayko
week_5_conect.docxMultiple Choice 1-6
The difference between the present value of an investment’s future cash flows and its initial cost is the:
internal rate of return.
discounted payback period.
payback period.
net present value.
profitability index.
Which statement concerning the net present value (NPV) of an investment or a financing project is correct?
An investment project that has positive cash flows for every time period after the initial investment should be accepted.
An investment project should be accepted only if the NPV is equal to the initial cash flow.
Any type of project should be accepted if the NPV is positive and rejected if it is negative.
Any type of project with greater total cash inflows than total cash outflows, should always be accepted.
A financing project should be accepted if, and only if, the NPV is exactly equal to zero.
The primary reason that company projects with positive net present values are considered acceptable is that:
the required cash inflows exceed the actual cash inflows.
the project's rate of return exceeds the rate of inflation.
they create value for the owners of the firm.
they return the initial cash outlay within three years or less.
the investment's cost exceeds the present value of the cash inflows.
Accepting a positive net present value (NPV) project:
means the present value of the expected cash flows is equal to the project’s cost.
is expected to increase the stockholders’ value by the amount of the NPV.
ignores the inherent risks within the project.
indicates the project will pay back within the required period of time.
guarantees all cash flow assumptions will be realized.
The net present value method of capital budgeting analysis does all of the following except:
provide a specific anticipated rate of return.
use all of a project's cash flows.
consider all relevant cash flow information.
incorporate risk into the analysis.
discount all future cash flows.
What is the net present value of a project with an initial cost of $36,900 and cash inflows of $13,400, $21,600, and $10,000 for Years 1 to 3, respectively? The discount rate is 13 percent.
−$1,195.12
$204.36
$797.22
−$1,350.49
−$287.22
Answer all portions of each question 7-9
7.
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Maxwell Software, Inc., has the following mutually exclusive projects. |
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Year |
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Project A |
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Project B |
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0 |
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–$16,000 |
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–$19,000 |
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1 |
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10,000 |
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11,000 |
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2 |
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6,500 |
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7,500 |
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3 |
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2,500 |
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6,500 |
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a-1. |
Calculate the payback period for each project. (Do not round intermediate calculations and round your answers to 3 decimal places, e.g., 32.161.) |
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Payback period |
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Project A |
years |
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Project B |
years |
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a-2. |
Which, if either, of these projects should be chosen? |
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b-1. |
What is the NPV for each project if the appropriate discount rate is 16 percent? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) |
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NPV |
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Project A |
$ |
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Project B |
$ |
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b-2. |
Which, if either, of these projects should be chosen if the appropriate discount rate is 16 percent? |
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8.
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Down Under Boomerang, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.91 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life, after which it will be worthless. The project is estimated to generate $2,150,000 in annual sales, with costs of $845,000. The tax rate is 30 percent and the required return is 11 percent. |
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What is the project’s NPV? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) |
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NPV |
$ |
9.
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Down Under Boomerang, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $3.00 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life. The project is estimated to generate $2,180,000 in annual sales, with costs of $875,000. The tax rate is 30 percent and the required return is 9 percent. The project requires an initial investment in net working capital of $400,000, and the fixed asset will have a market value of $260,000 at the end of the project. |
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What is the project's Year 0 net cash flow? Year 1? Year 2? Year 3? (Do not round intermediate calculations. A negative answer should be indicated by a minus sign.) |
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Years |
Cash Flow |
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Year 0 |
$ |
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Year 1 |
$ |
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Year 2 |
$ |
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Year 3 |
$ |
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What is the NPV? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) |
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NPV |
$ |
